Cargojet Inc

TSX:CJT

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Cargojet conference call. I'd now like to turn the meeting over to Mr. Martin Herman. Please go ahead, Mr. Herman.

[Martin Herman, executive]

Good morning, everyone, and thank you for joining us today on this call. With me on the call today are Ajay Virmani, our Executive Chairman; Pauline Dhillon, Co-Chief Executive Officer; Jamie Porteous, Co-Chief Executive Officer; Scott Calver, our Chief Financial Officer; and Sanjeev Maini, our Vice President of Finance.

After opening remarks about the quarter, we'll open the call for questions. I'd like to point out that certain statements made on this call, such as those related to our forecasted revenues, costs and strategic plans are forward-looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures like adjusted EBITDA, adjusted earnings per share and return on invested capital.

Please refer to our most recent press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliation of non-GAAP measures to GAAP.

I'll now turn the call over to Jamie.

[Jamie Porteous, executive]

Thank you, Marty. Good morning, everyone. Thank you for joining us on the call today. Pauline and I'll share a few thoughts on the state of our business before we pass the call over to our Chief Financial Officer, Scott Calver to give you a bit more color on the financial drivers. This quarter saw a healthy 6.5% growth in our core revenue segments of domestic overnight network, ACMI flying and ad hoc and scheduled charters.

While encouraged by the year-over-year growth, we remain somewhat cautious on our full year expectations. We continue to see margin improvements driven by our optimization of fleet and flight schedules and the rigorous management of block hours flown, especially in our domestic overnight network. Much of the heavy lifting on fleet optimization started early last year, and we're now starting to see its impact in our performance metrics.

On the domestic side, the volumes from our major customers have stabilized and improved sequentially each quarter since the middle of last year. Given the macroeconomic environment of persistent inflation and high interest rates, a much greater portion of household income is still being spent on borrowing costs, leaving a smaller portion for discretionary spending. As a result, we do not see or expect significant growth to return until financial conditions ease significantly for consumers.

On the international side, the macro conditions also remain weak and the current geopolitical situation is expected to further disrupt supply chains. This is leading to increased and somewhat temporary demand for global air cargo services as evidenced by several industry indicators, including IATA, which we hope to capitalize upon.

Most of our growth in Q1 is a result of us winning extra routes purely due to our exceptional service levels and not necessarily due to any macro growth drivers in air cargo demand. This is an example of squeezing blood out a stone, a long-standing trade of our entrepreneurial heritage.

Our ad hoc charter business remained steady at about $20 million to $25 million per quarter and we continue to support and win unique charter services around the globe. Additionally, new e-commerce market entrants, such as Temu and Shein are also introducing new supply chain models and we continue to pursue those opportunities.

In mid-January, we laid out our strategic priorities to focus on optimizing CapEx and generating free cash flow, including a framework on how we'll use our cash. We're particularly pleased to start the year with strong cash flow generation that will help us execute on these strategic priorities. We continue to return capital back to shareholders through our share buyback program and also paid down debt, reducing our leverage from 2.6x at the end of 2023 to 2.2x at the end of the first quarter, well within our target range of 1.5X to 2.5x leverage.

As I've said before, Cargojet is a customer-centric company, singularly focused on putting our customers first and enabling them to keep their promises to both shippers and consumers around the world. This is what makes us successful and builds long-term relationships. Our relationship with all of our key customers remains very strong. Pauline and I have made -- have met and continued to meet senior leadership at all of our key customers, and we continue to receive a very strong endorsement of our strategies and our commitment to industry-leading reliability and on-time performance.

Let me now pass the microphone over to my colleague, Pauline.

[Pauline Dhillon, executive]

Thanks, Jamie. Jamie and I are extremely pleased to have the first quarter under our belt, and it's certainly been a fun few months. Let me add a few thoughts on the macro environment before I jump into the specific initiatives that are driving our performance.

We're seeing a tale of two cities on the macro front. On the one hand, inflation appears to be cooling off and central bankers are hinting at cutting interest rates. Yet, on the other hand, the geopolitical situation, both in the Middle East as well as on the Russia, Ukraine front has the potential to disrupt global supply chains. All ocean carriers are avoiding the Red Sea, which is adding more complexity for importers to plan their supply chain. Closer to home, Cargojet remains focused on delivering shareholder value. Jamie spoke to the revenue side of our business, and I'll touch on the cost side.

We've been working extremely hard for the past 15 months and driving cost management. We're very pleased to see the new mindset is starting to get entrenched, and we're now seeing the real benefits. We continue to drive efficiencies in every aspect of our business. Streamlined maintenance processes are resulting in lower spare parts inventory and shorter turnaround times for aircraft. Decreased block hours, optimized schedules and better shift management are all contributing to cost reductions. Disciplined purchasing is yielding expense savings in key large ticket categories.

The investment we've made in our in-house simulators is also paying off. We're getting better utilization of our pilot training. This, in turn, is reducing pilot downtime, cutting travel and hotel costs and helping reduce crew over time. Another area of focus for us is information technology. We're putting a greater focus on how information technology can enable further productivity gains and provide deeper insights for faster decision-making. We're also monitoring the emerging AI-assisted tools that can provide faster answers by extracting relevant information from thousands of pages of manuals and in turn, can enhance technician productivity and aircraft maintenance processes.

We continue to drive efficiency in our ground operations to bring our unit cost down. In this fast-changing aviation environment, the biggest differentiator is going to be our people, attracting and retaining the best talent, building strong training programs that keep our teams current on emerging best practices is vital to our long-term success.

We're extremely proud of our dedicated and committed team of professionals, who are the true driving force behind Cargojet. We'd like to thank each of them for embracing the new priorities of profitable growth, focusing on cost reductions and always ensuring we deliver the best customer experience. The single, largest, faster driving customer experience is our on-time performance. I'm very pleased to share that our Q1 on-time performance remained strong at 98.7%.

This concludes my comments. I'll now turn the call over to Scott for an update on the financial drivers.

[Scott Calver, executive]

Thank you, Pauline, and good morning, everyone. I'd like to start with an update on our capital allocation priorities that we laid out in our January 15, 2024 press release. The first quarter delivered free cash flow of $168.7 million compared to $15.2 million for the same quarter in the previous year. Cargojet successfully executed on the initiatives that we had previously communicated. We had estimated the proceeds from disposition for 2024 to be in the range of $100 million to $110 million. Other than one small passenger aircraft, everything has been completed and we closed the quarter with proceeds of $101 million.

We've an acceptable offer for the small passenger aircraft, and we anticipate that this sale could be finalized in the second quarter, which would bring us to the midpoint of our proceeds target. I started this call with an update on the proceeds from dispositions because of how critical this is to support our key -- our 4 key principles for capital allocation and capital structure for 2024.

An update on our 4 principles is as follows: For the first key principle being to maintain dividend growth, this is an important part of our capital allocation long-term strategy. We're proud of Cargojet's long-standing history of delivering an annual increase in dividends to our shareholders. This year will be no different. More to come on this as the year progresses. The second key principle is to identify accretive growth opportunities that will meet margin requirements. And just a reminder that Cargojet has feedstock and the conversion slots secured for the next 2 Boeing 767 freighters, this should be considered a long-term investment in optionality as we navigate in the weak environment that Jamie and Pauline already discussed in the prepared remarks.

The key principle is to maintain the current share buyback program. Our share buyback program started in November 2023, and it has and will continue into the second quarter of 2024. As of this call and since we started the program back in the fall, Cargojet has spent approximately $90 million to support this key principle. We'll continue to assess the program throughout the remainder of the year, which leads me to the fourth key principle, our targeted net debt to adjusted EBITDA being between 1.5 and 2.5x. In the first quarter, Cargojet repaid approximately $130 million worth of debt. This lowered our financial leverage. As Jamie noted, Cargojet's net debt to adjusted EBITDA closed the quarter at 2.2x compared to 2.6x that was reported as at December 31, 2023.

I'll provide some additional commentary in regards to our operating expenses. Maintenance costs increased by $2.3 million compared to the prior year. There was a onetime expense with an offset in other pass-through revenue that explains approximately 50% of this variance. Cargojet provided support to one of our strategic partners by assisting them on a required C check. The remainder of the increase is inflation in both parts and labor costs. Heavy maintenance has increased compared to the prior year as a result in the increased size of our fleet. Sequentially, heavy maintenance is flat to the fourth quarter of last year.

Aircraft costs are down compared to prior year as a result of less reliance on subcontract charters. Crew costs have increased approximately 5% compared to the prior year for 2 factors. There has been normal wage inflation for salaries. We also experienced an above-average aircraft repositioning-related crew costs in the first quarter. We're starting to see rationalization in the passenger airline space with one airline exiting the market recently. This is easing the pressure on pilot recruitment, and we expect crew costs to normalize in the latter half of this year.

Depreciation has increased compared to prior year as a result in the increased size of our fleet. You'll note a $3.7 million reduction compared to the fourth quarter of 2023. The reduction is sustainable going forward. The reduction in maintenance CapEx over the last 4 quarters was a key cost control initiative as Cargojet reduced the number of spare engines to a level that is appropriate for our current revenue and fleet profile. It is important to understand that the lower levels of maintenance CapEx is not a cost deferral exercise. It should be viewed as an adjustment of invested capital to support our revised strategic plan. You'll see a slight reduction to ground services, airport services, navigation and insurance, both the prior year and sequentially to the fourth quarter. This is primarily the result of changes in mix of revenue. There is an offset or a reduction in other pass-through revenue, and therefore, there is no impact to EBITDA profitability.

SG&A is flat to prior year. The timing of incentive costs is offset with the foreign exchange gain. Salary and benefits has increased $1 million compared to the first quarter last year. This reflects inflation in certain parts of our business to remain competitive with our current wage structure.

A few comments about cash flow and how this impacted our March 31, 2024 balance sheet. Cash flow from operating activities closed the quarter at $55.7 million, down approximately $10 million compared to the prior year. After including changes in noncash working capital, net cash flow from operating activities improved by $17.2 million. The improvement in the noncash working capital is driven from the amount of fuel that we had both in our accounts receivable and our accounts payable with high fuel prices in the previous year.

As mentioned earlier, the cash provided from investing activities benefited from the $101 million in proceeds as it relates to exiting our commitments to the Boeing 777 program. The $18.5 million gain on disposal of property, plant and equipment is consistent to what the company had indicated going as far back as early 2022. The risk mitigation for growth capital expenditures is now visible in our Q1 results. The maintenance CapEx reported in the first capital -- first quarter, sorry, is still benefiting from the cost reduction program from 2023. Maintenance CapEx will be back-end loaded in 2024. And at this time, we anticipate the range for committed maintenance CapEx for 2024 to finish the year at $140 million to $150 million.

With the $80 million cash from operations and the $88 million generated from investing activities, as mentioned, CargoJet repaid $130 million worth of debt, while supporting the share buyback program with share purchase of $46 million in the first quarter.

While we're pleased with what the team has accomplished in the first quarter, the management team continues to manage in a stubbornly weak freight market that has no shortages of risks and uncertainties for the foreseeable future.

I'll now pass the call back to Jamie and Pauline for any questions.

[Pauline Dhillon, executive]

Operator, we'll start taking questions, please.

[Operator]

[Operator Instructions] Our first question is from Kevin Chiang from CIBC.

[Kevin Chiang, analyst]

Maybe just going back to your outlook for this year, I understand the cautiousness. But I guess if I look at historically, also the pre-pandemic, the typical seasonality in Q1 versus the rest of the year, Q1 is roughly 20% of EBITDA, you call low 20% in the past couple of years, it's been closer to 24%, 25%. Just I guess what do you think the new norm is for seasonality for your business? And do you think normal seasonality is what we should expect in 2024 after this Q1? Or is it even tough to forecast that just given the puts and takes in the freight market?

[Jamie Porteous, executive]

Kevin, it's Jamie. Thanks for your question. I think we're just being a little cautious this year. You're right. I mean typical -- typically, seasonality in the second half of the year is typically stronger than the first half of the year. And while -- as we expressed, while we're very pleased with the results in the first quarter, we started the first quarter, I think -- started the year talking about sort of mid- to high single-digit growth for the business, saw some good momentum in the first couple of months, particularly when sort of sentiment was around inflation coming down, interest rates coming down. But as everybody has seen in the last part of the quarter and certainly in April, it doesn't seem that that's anywhere close on the horizon.

So our sort of an enthusiasm about the growth for the balance of the year, somewhat tempered by that. So I think you'd still expect that the second half of -- all things being equal, that the second half of the year, typical of our historical experience, will be stronger than the first half of the year. I guess the question is just how much stronger, and we're just being a little conservative on our expectations this year.

[Kevin Chiang, analyst]

Okay. That's helpful. And then just -- obviously, a lot of good momentum on the cost containment front. I guess, is there a way to think about how we should be looking at, let's say, total cost or total OpEx, excluding depreciation and fuel on a per block hour basis? We saw a good momentum last year, and it looks like on a year-over-year basis, things continue to look good in Q1 of this year. Should we expect that trend -- that relative trend to continue in Q2 onwards in terms of cost per block hour basis? Or is there anything you'd highlight that might make -- that we should be mindful of.

[Jamie Porteous, executive]

Yes. No, I can add, maybe Scott or Pauline can add their comments, too. But no, I think you should fully expect that we'll continue to see -- as we both mentioned in our opening remarks, I mean, we've been sort of singularly focused on managing our costs, understanding the current revenue environment, and we've really seen, particularly this quarter, year-over-year in the first quarter of last year, and most of our -- in terms of managing the block hours is more focused on the domestic network because that's where we've the control.

The ACMI business obviously is controlled by our customers as is the charter and scheduled. But we've seen significant -- in the quarter alone, I think we were down 16% in total block hours on a year-over-year basis, and our revenue per block hour was up 18%. So that's a good indicator that we're generating stronger volumes, we're putting more revenue on less block hours, and that focus will continue in terms of managing the block hours. And equally, as Pauline said, I mean she can add some comments, we're continuing to focus on the cost side.

[Pauline Dhillon, executive]

Yes. Thanks, Jamie. Kevin, yes, I echo Jamie's comments. We've worked, as I said earlier, the last 15, 16 months on cost, we've really taken the team. We've introduced a new culture of cost savings, it's been a primary focus. And going into Q1, we could really see the benefits of the new processes that we put in reduced inventories, looking at block hours, driving efficiencies right through not only the domestic network, but through the organization as a whole. It's been a focus. It will continue to be a focus.

And the biggest win here is the team is now embracing the cost efficiency programs that we've put in place. For example, even getting the simulators, both the simulators, operational and running, that saves us flying crews to Miami or Dallas. It saves hotel nights. It saves crew over time. The simulators are both fully operational and being utilized. And when they're not being utilized by us, we're going out to the market and selling the hours. So we're looking at costs, revenue, everything on a daily basis.

[Kevin Chiang, analyst]

That is super helpful. And then just last one for me, maybe more of a modeling question. Just I guess, Scott, how should we think about the, I guess, the spread between fuel costs and I guess the fuel surcharge and other cost pass-through line? There's almost $20 million this quarter. Maybe just how we should be thinking about some of the moving parts and maybe the impact of, I guess, given the volatile fuel price environment in Q1, maybe how that impacted that spread?

[Scott Calver, executive]

Yes. Thanks, Kevin. Q1 was a good year as it relates to the lag because we really didn't have much of an impact. And really, what's best -- for your modeling, what I'd do is go sequentially off of Q4 into Q1, you really can't compare year-over-year because the fuel prices were so high, and the movement in the fuel price changes last year were quite variable. But -- so you get more of a normalized view when you do sequentially from Q4 into Q1. And then really where it was somewhat fortunate because it's very hard to tell, because there's a bunch of other revenue in that fuel pass-through and other revenue.

So it's really hard to make that direct connection. But at least from Q4 to Q1, it's most normalized, if you'll. And when you look at the reduction in fuel prices that we experienced in the last couple, 2 or 3 weeks of December, those came back a little bit. We had price increases, moderate ones throughout Q1, but they're pretty much offsetting. So there was a little bit of a tailwind from fuel in Q1, but immaterial in the grand scheme of things. So this is our best quarter to understand it in a sequential way of looking at it.

[Operator]

Our following question is from Konark Gupta from Scotiabank.

[Konark Gupta, analyst]

So wanted to ask you on the ad hoc charter business. The segment was pretty strong, I think, $20 million revenue, which is not a bad number compared to historicals, clearly. However, I'm wondering if the Red Sea, the geopolitical effect and all that, they might have pushed that number a little bit higher. So is there anything in the quarter, where you were kind of reallocating capacity to some other parts of the business, which is why you could not capitalize on some opportunities? Or is there something else that we should be mindful of?

[Jamie Porteous, executive]

It's Jamie. No, the only thing that impacted the quarter was there was some onetime revenue that we were -- that we had generated in Q1 of 2023 with a flight that we were doing from JFK to Hamilton that didn't repeat in 2024. But the pure ad hoc charter portion of it was actually up 24% in the quarter, and we expect that to continue to be strong. And I can tell you, in the month of April, it's continuing to be very strong for all of the reasons that you outlined.

[Konark Gupta, analyst]

That makes sense. Then you mentioned, Jamie, about some of these Asian suppliers or sellers -- e-sellers, shipping stuff into North America, like Temu and Shein. What kind of opportunities do these guys present to you guys like in terms of what have you done with them recently, if at all? And then what kind of discussions are you having with them?

[Jamie Porteous, executive]

We haven't done anything directly with them, indirectly through some freight forwarders that represent them. My point was we've just seen a lot more activity in terms of requests for charters. We've done a few at Christmas and just after out of China into North America, and it just seems the activity and the conversation about additional capacity being required to meet the needs, particularly of Chinese-based e-commerce suppliers like Shein and Temu that I talked about and AliExpress, seems to be increasing. So nothing significant right now, but I just think it's opportunities that we're going to continue to pursue that could be realized later this year.

[Konark Gupta, analyst]

That's great. And the last one for me, I think perhaps for Scott. The free cash flow was very, very strong in Q1 and even if you strip out the asset sales, at the end, it seems like a pretty good number. In terms of the remainder of the year, how should we expect the free cash flow or cash flow conversion from EBITDA levels?

[Scott Calver, executive]

Konark. Yes, it's -- I guess what I'd say is consistent to what we've said in the past, what we said on that January 15 press release, what we've demonstrated in Q1, we've the proceeds done. CapEx hasn't changed. We still plan on doing the growth CapEx of one -- I'm sorry, one Boeing 767 later this year. Maintenance CapEx, it will be committed to in the year. There could be some cash flow timing in Q4 depending on how quickly some of this work is completed.

But really, what I'd say it's just consistent to what we've said in the past. Really the decision is what we do about debt repayment versus buying back shares. And we're going to monitor that. We're going to -- there's different scenarios that we've in mind that if things worsen and this economy goes the wrong direction, then we'll be more defensive with our capital allocation. But right now, we're going to still target that -- the free cash flow to go to the share buyback program and delever within that range that we previously communicated for debt to EBITDA.

[Operator]

Our following question is from Matthew Lee from Canaccord.

[Matthew Lee, analyst]

In your prepared remarks, you mentioned the improving outlook on cargo. Can you maybe just talk about what sort of customers are bouncing back the quickest? I know maybe who isn't just maybe the e-commerce players perhaps a cover on the B2B side or maybe some other things that are affecting that outlook?

[Jamie Porteous, executive]

Yes. I think most of the -- as you'd expect, most of the bounce back or most of the growth we've seen on the domestic and the ACMI is related to stronger e-commerce growth, somewhat tempered, as I said in my prepared comments by somewhat lower expectations because of potential lower discretionary spending by consumers because of continued high inflation and high interest rates. But that's where the biggest growth factors come in. My comments about the -- if you look at some global indicators like all of you guys do, I know like IATA or WorldACD or Xeneta's report, they'll all show strong double-digit global air cargo demand at least in January and February.

I think a lot of that is driven by some of the geopolitical situations around the world. I can tell you from a charter standpoint, a lot of the charter activity that we're seeing now is related to supporting both relief missions and military supplies either into the Middle East or into Poland and other places to support the Ukraine.

[Matthew Lee, analyst]

Okay. That's helpful. And then maybe in terms of your block hours, it's still like you've done a pretty good job cutting down block hours in the last 12 months. But if you continue to see ACMI growth that DHL and e-commerce bounces back kind of like we just talked about, how you'd be able to build up that capacity again? Is it just a matter of buying a couple of aircraft? Or are they more involved?

[Jamie Porteous, executive]

No. I think we said before, Matthew, we're very confident. I think the quarter kind of illustrates that in 2 of those revenue segments where we could -- I think I've been conservative in saying that we could grow revenues in our domestic and our ACMI business by sort of 15% to 20% per year year-over-year on the existing fleet, and that would be by -- on the ACMI, we're really doing that right now with the extra aircraft that we've operating for DHL.

We're operating 17 aircraft this quarter, this past quarter versus a contract of 15. Equally, the 16% or 17% increase -- sorry, the 18% increase in net revenue per block hour on our domestic business, we actually did that on lower block hours. So we've a lot of runway left to add additional incremental revenue without -- before we add aircraft, just with our existing fleet.

[Operator]

Our following question is from Chris Murray from ATB Capital Markets.

[Chris Murray, analyst]

So maybe turning back a little bit to the comments around ACMI and the availability of aircraft. So I guess a couple of questions on this. I mean, first, what do you think the sustainability of keeping those 17 aircraft? As you mentioned, Jamie, your contract is 15, but you're running 17. But how long could you think that, that just becomes kind of the new normal, if you'll.

And then along those lines, you've also, I guess, said you've got two 757s that are -- that you're at least investigating what you're doing with that. Could those other aircraft get turned into either ad hoc charter or other ACMI aircraft? So sort of any color on that would be helpful.

[Jamie Porteous, executive]

Chris. On the ACMI flying, I mean, the 2 additional aircraft that we're operating and have been since the fourth quarter of last year, they were initially extended into the first quarter and then subsequently have been extended into at least the end of the second quarter of this year. So we're confident we'll be operating those for half the year, a little premature to speculate other than from a historical demand standpoint, as I mentioned in response to one of the earlier questions, as you know, typically, the second year -- sorry, the second half of the year is typically stronger than the first half.

And if we've the customer needs that capacity today, going into the summer, maybe questionable, but certainly going into the fourth quarter, you'd expect that if the ban stays strong, they would need that capacity and would therefore be reluctant to give it up for a short time. That's just my opinion. So I think we're moderately confident that, that will continue for the balance of the year.

And your question on the block -- on the aircraft, you're right. I mean we do -- we've 1 of the 7 -- if you recall, at the beginning of the year, we said we had 4 surplus 757s that we had put up for sale. We reduced that in the quarter to 2, primarily because we were using those aircraft for specifically the purposes that you mentioned for either allowing us to adjust other flying in our network to free up necessary aircraft to provide to our ACMI customer and/or for additional ad hoc charters. And we -- while we've one of our 757s that is up for sale, we did the C check on it. So rather than waste any hours we sort of frozen that and parked it, but the other aircraft we regularly will -- is available and we regularly utilize it as part of our -- and as demand dictates.

[Chris Murray, analyst]

Okay. That's helpful. And I don't know who wants to take this one. But when I kind of take a half a step back, you talked about increased utilization on an existing aircraft pool. Some of the stuff you've done around cost control, and that sounds really good. You start putting those things together and even if it's a relatively modest growth environment, you were thinking you'd be starting to generate some operating leverage.

Scott, I know we've talked about fuel surcharges and the impact that they'll have on EBITDA margins. But when we start putting this together, what's your expectation or what's your thoughts on how margins should be able to grow through the year, if all the things sort of play out the way we've seen it set up in Q1 at this point?

[Scott Calver, executive]

Yes, Chris. Yes, there's really 2 factors there. And really -- just start with the ACMI, that really depends on the network with our customer there in terms of the number of block hours per aircraft and we saw that go in the wrong direction last year. So there's always that uncertainty, as it relates to network changes with that particular customer. But on the domestic side, you're right, there's operating leverage. And to Matt's point, I think it was Matt, that asked it earlier, our cost per block hour is -- it was -- and I do -- cost per block hour, I exclude fuel because we get that risk covered in our fuel surcharge and I exclude depreciation because that's a long-term, more strategic situation than managing current costs.

But when you exclude the fuel and depreciation, it's about $5,500 per block hour. It was that in Q1 last year. It's that again in Q1 this year, very similar to Q4 as well. So -- but then there's the operating leverage. You're right. It's mostly in that domestic revenue and that a lot of that revenue will fall the bottom line because the costs are already there. To your point, it's the utility and the concentration of cargo going into that aircraft. But that's -- again, that's where we're most exposed in the soft economy as well is with that revenue. And that's where we're most cautious and that's where we've seen reductions compared to last year. So it can go both ways. Obviously, we're going to be ready when it goes positive, but we still have to be cautious in case it goes in the wrong direction in our domestic network.

Because to Jamie's point earlier, to take out block hours in our domestic network, we've done it on 2 different occasions last year. It sounds a lot easier than it actually is because you're working with customers to change pickup and delivery times and it's really going to be hard to find more opportunities like that to that extent. So really, that cost structure is what it is, and we're exposed either good or bad in terms of the revenue that we can layer into our domestic revenue.

[Operator]

Our following question is from Cameron Doerksen from National Bank Financial.

[Cameron Doerksen, analyst]

I just wanted to dig a little bit deeper into the domestic operation because you had pretty solid growth in the quarter year-over-year. And yes, we've heard from most of the packaging carrier players out there that their volumes were -- their biggest actual package volumes were down year-over-year. And so I'm just wondering if you can talk a little bit about where you're seeing the outperformance? Is there -- obviously, there's a volume versus price at play as well. So just any thoughts around that? Because it does seem like your domestic revenue growth is -- you're performing a lot better than what you might see given some of the other packaging carrier guys are saying as far as volumes go.

[Jamie Porteous, executive]

Cameron. It's Jamie. The -- I think one reason you see that compared to some of the other that you've noted is a reflection of the mix of customers that we've on our domestic network. We're not entirely dependent on one source or one type of customer. By that, I mean, obviously, we've a good mix of e-commerce customers, which as I indicated before, is -- continues to be a big driver of growth, but we're not solely dependent on e-commerce. We've the B2B section of our business, which is relatively flat year-over-year. We've a good mix of interline business, where we've -- it's not high-yielding traffic, but we've 50-something commercial agreements with other airlines around the world that fly into Canada mostly into major gateways like Vancouver, Toronto, Montreal, that have to get cargo across the country as well as 400, 500 noncontract customers that are made up of everything from any type of transportation company, freight forward or carrier that we deal with on a regular basis.

And I think that mix -- and we specifically keep that mix because it allows us to -- when it's soft in one segment like B2B, we get the uptick in another segment like e-commerce. I think that's really the fundamental difference.

[Cameron Doerksen, analyst]

Okay. No, that makes sense. And just a very sort of short term, I'm just wondering if you can comment on how volumes are trending, I guess, so far earlier in -- early in Q2? And what are your conversations with your customers? Any thoughts there on what they're sort of telling you what their expectation is for volumes through Q2 and maybe into the early part of Q3?

[Jamie Porteous, executive]

I think everybody has been pretty consistent with what our experience has been, where we saw fairly healthy -- sorry, above what we were expecting in terms of demand in January and February, and that was kind of trending in the right direction. March was a little softer than we had experienced in January and February, and I think that was a reflection of the -- as I said earlier in my comments, the expectation that interest rates and inflation was going to be tampered. Interest rates were potentially coming down and there will be more consumer spending than we had seen that would indicate stronger demand going forward.

But although we saw a good demand in March, it was a bit of a funny month with Easter falling in the last part of the month versus April typically. So we had 1 less operating day in the quarter than the previous year, which should be noted. But I think most of our customers that we've spoken to have sort of the same sort of guarded optimism, I'd call it, for the balance of the year.

Any more questions, operator?

[Operator]

Yes. I'm so sorry. Next question is from David Ocampo from Cormark Securities.

[David Ocampo, analyst]

I just had a quick one and it's just a follow-up to Kevin's line of questioning on the fuel revenue and fuel expenses. I mean, over the last few quarters and I know there's some notation in there with the other revenues in that number. But it's been negative fuel revenue versus fuel expenses. Just curious how we should be thinking about that in the long term? Is your expectation that the revenues will fall short of expenses? And curious if anything has changed and how you guys are lumping in revenues and expenses for those line items?

[Scott Calver, executive]

Yes. So again, I definitely understand where you're coming from here because it is really hard to assess the impact of fuel on this business and primarily because when you look at the revenue line, the fuel and other pass-through revenues, there is a lot more going on in that line than fuel surcharge. And it kind of ties to my comments earlier that direct expenses, there's an offset to that. So it doesn't impact EBITDA when there's pass-throughs for navigation or landing or parking, some of these things that we do. But -- so there's a lot of noise going on in there. But what I'd say is, again, sequentially from Q4 to Q1, it's normalized.

So if nothing else changed in our network that would draw more other pass-throughs, then that would be the steady state going forward. That would be a fuel doesn't change because, again, the fuel came down in the last 2 or 3 weeks of December, but then it started to steadily increase throughout the year, just moderately, but it was enough to offset some of that, what I thought was going to be a more significant tailwind in late Q4 compared to Q1 experience. So really, I think that relationship is pretty consistent when you look at the relationship between fuel expense compared to the fuel and other pass-through revenue. That relationship is pretty consistent from Q4 to Q1 with a little bit of tailwind from fuel on that, say, but it's normalized.

[David Ocampo, analyst]

I got the commentary on Q4 to Q1, just given the delta there. But has something changed? Because historically, if I go back 2019, 2020, 2021, it's always been a positive fuel revenue versus fuel expenses.

[Jamie Porteous, executive]

The only -- I'd say, David, it's Jamie here. I'll just add some comments. One thing you've to keep in mind. And really, when you're comparing our direct fuel cost to the fuel surcharge revenue, it really only gives you an indication like a lag in the recovery of the higher cost of fuel or lower cost of fuel, whichever way it may go. It doesn't give you a sense of what's -- are we recovering 100% of our fuel because you've to remember that part of the cost of fuel, in fact, a big part of the cost of fuel is baked into the customers' base rates. You don't see that. It's baked into the revenue number. The only thing you see in the fuel surcharge is the excess price of fuel over and above the rate for fuel that's baked into their price.

[Scott Calver, executive]

Yes. And really, a lot has changed. If you go back that far historically, so much has changed, like Jamie said, in the resetting of base on the rates, the type of flying we do that either attracts more or less other pass-throughs for outsourced ground handling, et cetera. And we sell fuel now as well. We -- because of our presence in the Hamilton Airport. There's a -- so there's a lot going on in that line. A lot has changed over the years.

[David Ocampo, analyst]

Okay. So it sounds like some of the fuel revenue got moved into your base rate. So that makes a lot of sense.

[Operator]

Our following question is from Walter Spracklin from RBC Capital Markets.

[Walter Spracklin, analyst]

So you've a lot of kind of longer-term contracts in place that, in some ways, predate this big inflationary environment. And I know you do have a way to capture those back that inflation, but it's more tied to CPI rather than the need to wait for the contract to renew so that you can raise the rate.

So first, perhaps confirm that that's the case. But more importantly, given CPI is a bit of a lag and we're starting to see inflation wane, is it possible that even by doing nothing here, your contracts that reflect the lagging CPI allow you to get a better price/cost spread in the current environment, as inflation wanes and perhaps allows you to increase your margin really without doing anything here this year?

[Ajay Virmani, executive]

Walter, it's Ajay. We do have longer-term contracts with CPI, some contracts with CPI, some would be CPI plus 1, some would be CPI minus 1, depending on the volumes, depending on who the customer is. But these are longer-term contracts. If there is -- we obviously have a built-in fuel factor. So a lot of CPI is reflective of the energy costs out there. So if the fuel goes up, we've the fuel adjustment factors. So majority of that increase is covered through the fuel surcharge.

The second part of it is that once you've a contract with a customer and if, lets say, we do have CPI or sometimes we also have a certain percentage. For example, we might have a CPI, but a maximum of 3 or minimum of 2. So if, for example, the CPI goes -- is only 1.5%, which we saw last year or a year before, and we've a minimum 2 or minimum 3. So we've been getting over sometimes as well. So it's very hard to go change the contracts in the middle of the -- that's the chance we all take. But also keep in mind, if there are any extraordinary circumstances like where there is government cost increases, whether landing, the navigation or some of the security surcharges, those, sometimes we can recruit other than CPI as well.

But just generic CPI is very hard to -- because it's up. Now if it went up to 7%, 8%, 9%, 10%, trust me, we'll try and we'll try to get those things. But if it's a couple of points, we've got to take it and move on with it.

[Walter Spracklin, analyst]

Okay. Next is, you mentioned that there was, obviously, with the shutdown of one of the passenger airlines, it's reduced some of your -- the pressure on pilots and sourcing pilots, which is great. But I'm just curious what else in the competitive environment you're seeing with other air cargo service providers? I know WestJet and Air Canada have fairly recently brought on cargo operations, but they're tinkering with them as well. And perhaps you can update us as to whether you see any opportunity? Is that -- Is the competitive environment improving? Just some color there would be great.

[Ajay Virmani, executive]

I -- first of all, yes, we -- one passenger carrier was certainly helpful in our pilot recruitment because there is at least couple of hundred pilots that were available. The market for pilots is still very strong. Although capacity and demand have somewhat -- is somewhat less than what people expected or it is a bit less, you probably know that better. So we expect that the pilot shortage and the pilot issues will not be a big factor this year. We lose a few pilots here. We gain a few pilots there. So that's probably going to continue on. So we don't expect any huge shortages.

As far as the Air Canada and WestJet are concerned, they do have some one of freighter cargo operations that are still in operation. But they're not sort of any way or shape irritants or competing with us in any big way. They've their own market, they've their own niches. It hasn't impacted us in any big way at all. As a matter of fact, we've longer-term customer contracts. So they're there, but they're more to provide connectivity the way we see it through their international programs on their wide bodies. So if their wide bodies are coming in from South America -- or sorry, if their freighter operations are going into South America, they'll connect with the European and Far East wide bodies out of Toronto and Montreal.

So they've their own sort of issues going on in terms of the market conditions and excess capacity on the passenger wide-body planes. And so it doesn't really impact us. We've a very different sort of customer mix with e-commerce, domestic, scheduled network and ACMI. So our markets are entirely different from what they're continuing to do.

[Walter Spracklin, analyst]

Okay. And last one here, this is for Scott. You mentioned the cost initiatives that you've done and very successfully. So is it fair to say now that as Jamie talked about, perhaps, in a weaker environment, can you hold on to that cost per block hour? In other words, can you maintain margins in a flat environment?

And then as you pointed out, is there -- or my question is, if volume starts to scale up, how much volume growth do you see as being able to bring on to that block hour cost level without any need for increased costs that come with it?

[Scott Calver, executive]

Walter. I'll get the first part of that question, certainly, and then I'll get Jamie to come in, in terms of the capacity on the revenue side with this current cost structure. But yes, no, absolutely, the EBITDA margin is sustainable. That's for sure. Depending on if you went in a softer, weaker economy, it would be challenging to be able to hold it depending on how extreme any reductions would be. But we definitely would manage those costs as best we could to maintain that margin. On the upside, yes, there could be some opportunity there for -- with the operating leverage that we previously talked about. But yes, no, maybe, Jamie, just in terms of some of that operating leverage, some of the......

[Jamie Porteous, executive]

Yes. No, I think our focus and our goal and our expectation is that EBITDA margins in the mid-30% range are sustainable, whether we've -- we should improve those if we've a significant increase in demand and revenue. But even with some softness, we're confident that we're able to manage the block hours downward to maintain those margins in that mid-30% range.

[Operator]

Our following question is from Tim James from TD Securities.

[Tim James, analyst]

First question, I guess for Scott, I'm just wondering if you could talk about the CapEx and kind of the cadence over the balance of the year and sort of what's back-end weighting and I think you mentioned most of it will come during the latter part of the year. The first quarter was quite light. If you could just provide some more color around the timing and impacts over the balance of '24.

[Scott Calver, executive]

Yes, absolutely. There is a little bit of, I'd say, a carryover effect from last year. That's obviously in these numbers for lower CapEx in Q1. But engines are way up to rebuild shops and we're getting ready to start this next conversion. And a lot of these payments, whether it's an engine rebuild or a conversion, that's primarily most of our CapEx, whether it's the maintenance CapEx on the rebuilt engines or the conversion for the growth CapEx. But you make progress payments throughout that whole project with a smaller amount due at the very end of the project. So a slow start to the year, it will be back-end loaded.

Like I said in my prepared remarks, we're still standing behind those numbers that we issued on January 15. It will be committed to. There could be some carryover. It's going to take some time here over the next few months to understand any impact, but it would just be cash flow timing of a quarter in terms of carryover effect, it wouldn't be all that material. So really, yes, that's -- everything is well underway. Everything is in place to execute on what we previously communicated.

[Tim James, analyst]

Okay. My second question, just wanted to dig into what's a relatively small amount here, but the other revenue that came in at $9.2 million. And I think you touched on this in the commentary. Could you just sort of provide a little bit of additional detail on the significant increase in that number? I realize it was relatively similar to Q4, but on a year-over-year basis, it was up quite a bit. What was driving that?

[Scott Calver, executive]

Yes. In that $9.2 million, it's what we call fixed-based operations, and this is providing -- and again, things like deicing services in a place like Hamilton, where we do all the deicing for all the aircraft. There's a lot of just more seasonal revenue, I'd say, as it relates to things like deicing and to some extent, fuel. But again, it's more of a pass-through effect, if you'll.

[Tim James, analyst]

Okay. So was there anything that sort of nonrecurring in there? Or is this a reasonable way to think about this revenue source going forward?

[Scott Calver, executive]

Yes, I'd say there's more of a seasonal implication.

[Operator]

[Operator Instructions] Our following question is from Jonathan Lamers from Laurentian Bank Securities.

[Jonathan Lamers, analyst]

Most of my questions have been answered. Just 2 follow-ups. One, in your prepared remarks, you mentioned carriers avoiding the Red Sea globally, what impacts are you concerned that this could have on your operations specifically?

[Jamie Porteous, executive]

I think it was more in terms of opportunity than impact. No direct impact on our operations, certainly not in domestic nor the ACMI. But the fact that supply chains have been disrupted because of that could lead and have led to additional ad hoc charter opportunities. That's what I meant with that, Jonathan.

[Jonathan Lamers, analyst]

Okay. Excellent. And also during the Q&A, there was some discussion about potential macro softness showing up in the domestic revenue trend later in the year. I know the vast majority of your air capacity has been sold out under long-term contracts, as you discussed. My question is with the truck transportation market showing some signs of pressure. Are you starting to see any pressure on rates in the ad hoc portion of your domestic business? And how are you thinking about potential impacts to your revenue trends later in the year?

[Jamie Porteous, executive]

Yes. No real impact on rates. I mean, as you mentioned, most of our rates are contractual. And even our ad hoc noncontract on the domestic, we've been able to hold the rates at the level that they were at the beginning of the year. It's just our cautious -- our cautiousness was really just reflected on my comments about we saw a stronger start to January and February than we were anticipating. And then sort of back to what we were originally forecasting as growth for the year, I think, somewhat impacted by, as I mentioned, higher -- continued higher inflation and higher interest rates.

[Operator]

We have no further questions registered at this time. I'd now like to turn the meeting back over to Ms. Dhillon.

[Pauline Dhillon, executive]

Thank you. Let's close the call off today by reiterating that we're singularly focused on delivering shareholder value by finding every single revenue opportunity that Jamie has highlighted and Scott's spoken to as well. Jamie has also touched on some of the opportunities we're pursuing due to the dislocation in the ocean carrier supply chains in the Red Sea. We're particularly pleased with the net cost discipline that we've spoken to earlier that we're seeing across the organization. We are disciplined in executing our previously stated capital allocation strategy that Scott's referred to.

That said, we're operating in a highly uncertain macro environment, and we'll continue to operate with a bias towards caution. We appreciate everybody's time this morning for joining the call. Have a wonderful day.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.